Economic Outlook for Consumers William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago University of Illinois Center for Economic and Financial Education Financial Fitness for Live Bloomington, IL April 19, 2010
The “Great Recession” appears to have come to an end around the middle of last year and the economy expanded by 5.6% in the fourth quarter
Fourth quarter GDP expanded at a fast pace with contributions largely coming from inventories, consumption and business fixed investment
The Chicago Fed National Activity Index bottomed in January 2009 and has been rising
GDP is forecast to grow above trend in 2010 and 2011
The forecast path of the current recovery is relatively muted compared with past deep recession recovery cycles
Inflation has begun to move higher
In large part due to the movement of oil prices
Removing the volatile food and energy components from the PCE, “core” inflation remains contained
Inflation is anticipated to rise by 1.7 percent this year and 2.0 percent next year
Employment has fallen by over 8.2 million jobs since December 2007
The unemployment rate appears to have peaked at 10.1% in October 2009
The unemployment rate is believed to have peaked in the final quarter of 2009 and is forecast to edge lower
Real disposable income growth remains weak
Real disposable personal income is anticipated to rise at a solid pace through 2011
The standard of living in the United States remains near its record high
Consumer spending improved in the second half of 2009
Consumer spending growth is expected to improve over the next two years
Personal savings rate has increased
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The stock market has improved since March 2009, but remains well below previous levels
After peaking in June 2005, home prices have fallen 28%
Homeowners’ equity stake plunged over the past four years
The home ownership rate has been moving lower
Mortgage rates are very low
Home price declines have been large
Home price declines in the second quarter, compared with a year-earlier, were quite large in the West and Florida 7 Red States 4 Light Blue States
Conditions improved in the third quarter with prices down around 4% compared with a year-earlier 4 Red States 7 Light Blue States
In the fourth quarter, home prices fell by just over one percent over the past year 3 Red States 19 Light Blue States
Housing affordability improved dramatically
Consumer attitudes for buying a home remain very low
Lending standards for mortgage loans remain tight
The forecast calls for a very slow recovery in housing
The financial obligation ratio has been moving lower
Both mortgage and consumer loan obligations have been improving for homeowning households
Debt as a share of financial assets has been falling over the past year
Low mortgage rates, greater home ownership participation and a strong housing market led consumers to increase their mortgage debt load over the past decade, however deleveraging is currently underway
Financial stress remains a major problem for the housing sector across all categories, but especially for adjustable rate mortgages and largely in subprime mortgages
Consumer credit as a share of disposable income has been moving lower over the past few years
Household net worth has begun to improve
The bank card delinquency rate have begun to move lower
The direct auto loan delinquency rate have also been falling
Indirect vehicle loan delinquency rate has been slowly improving
Personal loan delinquency rate appears to have peaked and is beginning to improve
The Fed has been very aggressive, lowering the Fed Funds rate by nearly 525 basis points
The Fed’s balance sheet has expanded in size and in composition
The outlook is for the U.S. economy to expand at a solid pace this year and next year Summary Employment is expected to rise moderately this year and next year, with the unemployment rate edging lower through 2011 Slackness in the economy will lead to a relatively low inflation rate over the next two years A big question remains about consumer spending/savings over the next several years The consumer does appear to be putting their financial house in order – is this by their choice?